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Another Look at the Ho-Lee Bond Option Pricing Model

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  • Young Shin Kim
  • Stoyan Stoyanov
  • Svetlozar Rachev
  • Frank J. Fabozzi

Abstract

In this paper, we extend the classical Ho-Lee binomial term structure model to the case of time-dependent parameters and, as a result, resolve a drawback associated with the model. This is achieved with the introduction of a more flexible no-arbitrage condition in contrast to the one assumed in the Ho-Lee model.

Suggested Citation

  • Young Shin Kim & Stoyan Stoyanov & Svetlozar Rachev & Frank J. Fabozzi, 2017. "Another Look at the Ho-Lee Bond Option Pricing Model," Papers 1712.06664, arXiv.org.
    • Handle: RePEc:arx:papers:1712.06664
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    References listed on IDEAS

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    1. Jirô Akahori & Hiroki Aoki & Yoshihiko Nagata, 2006. "Generalizations of Ho–Lee’s binomial interest rate model I: from one- to multi-factor," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(2), pages 151-179, June.
    2. Robert R. Bliss & Ehud I. Ronn, 1989. "Arbitrage‐Based Estimation of Nonstationary Shifts in the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(3), pages 591-610, July.
    3. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
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